Which of the following refers to the person who receives the policy death benefit when the insured dies?

A sudden death can place financial stress on those who depend on you. If this happens, life cover can help them pay the bills and other living expenses.

What is life cover

Life cover is also called 'term life insurance' or 'death cover'. It pays a lump sum amount of money when you die. The money goes to the people you nominate as beneficiaries on the policy. If you haven't named a beneficiary, the super trustee or your estate decides where the money goes.

Life cover may also come with terminal illness cover. This pays a lump sum if you're diagnosed with a terminal illness with a limited life expectancy.

Accidental death insurance is different from life cover. It will only pay out if you die from an accident. It will not provide cover if you die from an illness, disease or suicide. This type of cover often has a lot of exclusions.

To understand what's covered under a policy and the exclusions, read the product disclosure statement (PDS).

Decide if you need life cover

If you have a partner or dependents, life insurance can help repay debt and cover living costs if you die.

If you don’t have a partner, or people who depend on you financially, you may not need life cover. But consider getting trauma insurance, income protection insurance or total and permanent disability (TPD) insurance in case you get sick or injured.

How much life cover you might need

To decide how much life cover to get, consider how much money you or your family would:

• need — to pay the mortgage, credit cards and any other debts, child care, school fees and ongoing living expenses
• receive — from super, savings, the sale of any investments, your paid leave balance, and support from your extended family

The difference between these is the amount of cover you should get.

If you need help deciding if you need life cover, and how much, speak to a financial adviser.

How to buy life cover

Check if you already hold life insurance through super. Most super funds offer default life cover that's cheaper than buying it directly. You can increase your level of cover through your super fund if you need to.

You can also buy life cover from:

• a financial adviser
• an insurance broker
• an insurance company

Life cover can be bought on its own or packaged with trauma, TPD or income protection insurance. If it's packaged, your life cover may be reduced by any amount paid on other claims in the package. Check the PDS or ask your insurer.

Life cover premiums

You can generally choose to pay for life cover with either:

• stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
• level premiums — charge a higher premium at the start of the policy, but changes to cost aren't based on your age so increases happen more slowly over time

Your choice of stepped or level premiums has a large impact on how much your premiums will cost now and in the future.

Compare life cover

Once you know how much life cover you need, shop around and compare:

• benefits and policy features
• exclusions
• waiting periods before you can claim
• limits on cover
• the cost of the premiums — now and in the future

A cheaper policy may have more exclusions, or it may become more expensive in the future. You can find information about the policy on the insurer's website or in the product disclosure statement (PDS).

What you need to tell your insurer

An insurer will ask you questions when you apply for or change your insurance. These questions may be about your: 

• age
• job
• medical history
• family history, such as a history of disease
• lifestyle (for example, if you're a smoker)
• high risk sports or hobbies (such as skydiving)

If an insurer doesn't ask for your medical history, it may mean that the policy has more exclusions or narrower policy definitions.

The information you provide will help the insurer to decide:

• if they should insure you
• how much your premiums will be
• terms and conditions for your policy

It is important that you answer the questions honestly. Providing misleading or incomplete answers could lead an insurer to cancel or vary your cover, or decline a claim you make.

Making a life cover claim

If someone close to you dies and you need to make a claim, or if you need to make a terminal illness claim, see how to make a life insurance claim. 

Definition: In life insurance, the beneficiary is the person or entity entitled to receive the claim amount and other benefits upon the death of the benefactor or on the maturity of the policy.

Description: Generally, a beneficiary is a person who receives benefit from a particular entity (say trust) or a person. The eligibility to be considered for the benefits is confirmed either as per the specifications in the policy documents or by other legal norms such as that for a legal heir. The insured person is usually asked to mention the name of the beneficiary (who he would like to bestow the insurance proceeds upon his death) at the time of commencement of an insurance policy. There are also provisions for making a contingent beneficiary in case the primary beneficiary is no more or does not qualify the age criteria at that time.

Also See: Insurance, Annualized Premium, Group Policy, Claim Amount, Return, Annuity, Insurable Interest, Insurability

A death benefit is a payout to the beneficiary of a life insurance policy, annuity, or pension when the insured or annuitant dies. For life insurance policies, death benefits are not subject to income tax and named beneficiaries ordinarily receive the death benefit as a lump-sum payment.

The policyholder can structure how the insurer pays the death benefits. For example, a policyholder may specify that the beneficiary receives half of the benefit immediately after death and the other half a year after the date of death. Also, some insurers provide beneficiaries with different payment options instead of receiving a lump sum. For example, some beneficiaries elect to use their death benefit proceeds to open a non-qualified retirement account or elect to have the benefit paid in installments.

Death benefits from retirement accounts are treated differently than life insurance policies, and they may be subject to taxation.

• A death benefit is a payout to the beneficiary of a life insurance policy, annuity, or pension when the insured or annuitant dies.
• Beneficiaries must submit proof of death and proof of the deceased's coverage to the insurer.
• Beneficiaries of life insurance policies receive the death benefit payment free of ordinary income tax.
• Annuity beneficiaries may pay income or capital gains tax on death benefits received.

Individuals insured under a life insurance policy, pension, or other annuity that carries a death benefit, enter into a contract with an insurer at the time of application. Under the contract, a death or survivor benefit is guaranteed to be paid to the listed beneficiary, so long as premiums are paid while the insured or annuitant is alive. Beneficiaries have the option to receive death benefit proceeds as a lump-sum payment or a continuation of regular payments.

Beneficiaries receive the death benefit payment free of ordinary income tax, while annuity beneficiaries may pay income or capital gains tax on death benefits received. In either case, proceeds paid through life insurance or annuity death benefits avoid the cumbersome, often costly, process of probate, ultimately leading to timely payments to survivors.

Probate is a legal process whereby a will is reviewed to ascertain if it's authentic and valid. However, for most policies and accounts, if the policyholder does not name a beneficiary, the insurer pays the proceeds to the estate of the insured, which may be probated.

While not subject to income tax, life insurance death benefits may be subject to estate tax.

The process of receiving a death benefit from a life insurance policy, pension, or annuity is straightforward.

Beneficiaries first need to know which life insurance company holds the deceased's policy or annuity. There is no national insurance database or other central location that houses policy information. Instead, it is the responsibility of each insured to share policy or annuity information with beneficiaries. Once the insurance company is identified, beneficiaries must complete a death claim form, providing the insured's policy number, name, Social Security number, and date of death, and payment preferences for the death benefit proceeds.

Beneficiaries must submit death claim forms to each insurance company with which the insured or annuitant carried a policy, along with a copy of the death certificate. Most insurers require a certified death certificate, listing the cause of death. If multiple beneficiaries or survivors are listed on a policy or annuity, everyone is required to complete a death claim form to receive the applicable death benefit.

In 2019, the U.S. Congress passed the SECURE Act, which made changes to retirement plans, including the death benefits from inheriting an IRA.

The SECURE Act eliminated the so-called stretch provision for beneficiaries who inherit an IRA. In the past, an IRA beneficiary could stretch out the required minimum distributions from the account over their lifetime. Stretching out the distributions provided a stable income stream and helped to stretch out the tax burden.

Starting in 2020, non-spousal beneficiaries must distribute all of the money in an inherited IRA account within ten years of the owner's death. However, there are exceptions to the new law, such as spouses. There were other changes implemented–besides the ones listed here–due to the SECURE Act. It's important for investors to consult a financial professional to review the new rule changes to retirement accounts and their designated beneficiaries.

Death benefits under a life insurance policy are paid free of ordinary income tax. Still, estate taxes may be levied. Beneficiaries of an annuity with a death benefit may pay income or capital gains tax on the payout.

Don't rely on the insurance company to tell you! Try to find out before the policyholder dies whether or not you're named as a beneficiary. This database may have an answer if you think you are owed a benefit: the National Association of Insurance Commissioners' Life Insurance Policy Locator Service.

Beneficiaries must submit death claim forms, with a copy of a death certificate to insurers. If multiple beneficiaries or survivors are listed on a policy or annuity, everyone is required to complete a death claim form to receive the applicable death benefit.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.